Capacity models of cognitive functioning assume that the resources available for mental operations decline with age. An elaborated capacity model is developed here to make precise predictions about age changes in discourse processing, a cognitive domain that is a significant aspect of the everyday life of adults of all ages. We are concerned with the encoding into memory of both explicit and implicit information from text. To this end, we use prose passages constructed so that comprehension requires that a critical inference be drawn. Across experiments, we vary the contextual support for the inference, and we study age differences in the component processes involved in the drawing of an inference: activation of the relevant information, maintenance of that activation, and encoding of the inference. The model that guides this research ties the assumption of limited capacity to the concept of working memory. Working memory, in turn, is assumed to have both processing and storage functions. Our central aging assumption is that the general age-related decline in capacity is differentially distributed, so that the storage functions of working memory are affected to a much greater extent than are certain processing functions. In particular, the processes used to encode the explicit meaning of individual sentences are relatively exempt from aging loss. By contrast, the processes involved in encoding inferences are greatly affected by the age-related reduction in working memory capacity. The proposed program of research should enable us to localize the disturbance in inference production that several studies (including one of ours) have found in work with elderly persons. We should also learn about text and situational variables that have a beneficial effect on an older adult's ability to generate crucial inferences. Because it is the case that for all forms of discourse much important information is implicit, these results could have significant health-related impact. The findings of this research could, for example, provide information on how to best structure discourse materials on health, safety, and economic matters (e.g., information insurance options, medication instructions, use of hazardous home appliances).